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Why an Unstable Middle East Could Mean an Environmental and Economic Catastrophe

As the Arab Spring gives way to heated conflict, look for high gas prices and more pollution.

We don’t yet know the full implications of the new eruptions of violence in the Middle East. The crisis does appear to be spreading well beyond Libya and Egypt, and given the increasing absence of strongman dictators, who would (at the behest of the White House) use the full weight of the state’s security apparatus to shut down these protests, the situation has the feel of Iran, circa-1979. We don't have a crystal ball, but oil supply is always a concern when conflict arises in oil-rich countires, which may well trigger high gas prices and increased environmental dangers.

Let's take a look back at that earlier period of Middle East crisis and instability. Demonstrations against the Shah commenced in October 1977, developing into a campaign of civil resistance that was partly secular and partly religious, and intensified in January 1978. Between August and December 1978, strikes and demonstrations paralyzed the country. The Shah left Iran for exile on Jan. 16, 1979 as the last Persian monarch. In the resulting power vacuum two weeks later, Ayatollah Khomeini returned to Tehran, to be greeted by several million Iranians. That ushered in today’s Iran, especially after a national referendum discontinued the monarchy and approved an Islamic Republic on April 1, 1979. In December 1979, Khomeini became Supreme Leader of the country. It produced radical change at profound speed with secular westernized monarchy ultimately replaced by a fundamentalist Islamic dominated theocracy. Iran has since become one of the hardliners of the OPEC cartel and a recurrent source of instability in the Middle East, as we see today.

The current wave of protests and violence spreading through the Middle East have already awakened worry about oil supplies. It would nice to think that such a situation would spark the U.S. to embark on a grand Manhattan Project-style national program dedicated to the growth of alternative energy sources. Of course, that’s a pipedream, and highly unlikely in the post-Solyndra Solar world which we inhabit today.

It's troubling news to environmentalists, but I suspect that there will be a lot more attention paid to areas like the Canadian oil sands projects over the next few years. The bitumen-based heavy oil is dirty, consumes lots of water and does produce enormous emissions (which is one of the reasons why virtuous Canada has been one of the persistent violators of the Kyoto protocols).  But it’s Canadian and it’s secure. Over the past 10 years, Canadian crude production has risen by 600,000 barrels per day while Mexico’s has fallen by about that same amount.  As dirty as this kind of oil production is, the recent eruptions in the Middle East are almost certainly going to change the political calculus in favor of yet more production. After all, the question will rise, wouldn’t you rather have a reliable, long-term supply of crude from Canada than rely on unreliable OPEC-based suppliers in countries full of Islamic extremists?

How long can we rely on the Canadian oil sands? Probably for decades. The resources there are estimated at over 100 billion barrels. 

As far as the proximate cause of the riots now all over the region, we know that there were almost no protesters before the Libyan attack occurred. The attack itself was done with heavy weapons and was well-coordinated, which suggests the possibility of a planned 9/11 anniversary attack by a highly armed group of extremists.

The Libyans themselves had elected a non-Muslim government, and in the aftermath there has been an outpouring of pro-U.S. sentiment in the country. Still, it would be wrong to say that Libya is free of the scourge of Islamic extremism. After all, among the groups that overthrew Gaddafi's regime were the Benghazi Islamists whom we supported during the uprising, much as we supported the Taliban during their war against the Soviet Union. The town of Derna, which lies east of Benghazi, sent more jihadists to fight against the U.S. in Iraq than any other place in the Middle East. So the existence of an ostensibly moderate pro-West new government in Tripoli does not negate the fact that the country still harbors extremists who could have been behind the attacks. Libya is full of weapons, and it may be that the pro-U.S. government is unable to control extremists.

The violence is now spreading across the Middle East; there have been expanding attacks on US Embassies in Yemen, the Sudan, Egypt and other parts of North Africa. And as the protests have spread, it seems increasingly less likely that a mere YouTube video is the driving factor. As the Guardian reports:

 “Very few of the people setting fire to the German embassy in Khartoum, attacking the American school in Tunis or torching a KFC in Beirut will have even seen the Innocence of Muslims. If the prophet had really been insulted, you would see 100 million in the streets. Instead we only see a few thousand.”

Then there is Egypt, which is potentially even more grave, not only home to the Suez Canal, but also the largest and most influential branch of the Muslim Brotherhood. As Egypt’s Supreme Council of the Armed Forces (SCAF) took the reins of power in February 2011, many observers believed that a tacit understanding existed between the powerful Egyptian military and the Brotherhood, the most organized political and social group in Egypt. For the next 18 months, this complicated and largely behind-the-scenes contentious relationship between these two powerful entities had its ups and downs.

When SCAF sided with millions of Egyptians in ousting Hosni Mubarak in early February 2011, it was not to advance the objectives of the revolution but rather to sacrifice the president in order to save his regime. But newly elected President Morsi, the Muslim Brotherhood’s reluctant stand-in candidate, appears to have outflanked the military and other security forces, and instead consolidated the dominance of the dominant Brotherhood, which has deep roots in the country.

There are serious concerns here from a Western perspective. The Arab Spring was initially dominated by seemingly modern, moderate, pro-Western people. But they are a minority in a country which is now more likely to be overwhelmed by the Brotherhood in the context of weak democracies. The facts that 1) it has been uncovered that the maker of the film was an Egyptian Christian Coptic who has a long record of being jailed in the U.S. for illegal money-making schemes; and 2) there were no Israelis or wealthy Jews behind the film are not going to be heard by the crowds on the streets. The Brotherhood may well use this event as a pretext so it can move in a more viscerally hostile anti-Western direction.

So why does this matter for you? Well for one, you’re certainly likely to be paying more at the pump as the violence spreads and risk premiums get built back into the oil price (which is now up some 25% from its lows of the spring). And if the Arab Spring turns less benign, then it is going to become more anti-American and anti-West than anyone could have possibly envisaged a few months ago. 

The day of the dictators appears to be over, which means it can’t be shut down, much like the Ayatollah Khomeini’s influence in Iran in the late 1970s and early 1980s. If this is indeed the future, then down the road this could well pose a threat to Arab oil supplies to the West. That would be a very big negative to the economy acting as a quasi tax rise, which could easily offset any benign supply/demand forces stemming from increased domestic production. The latest Department of Energy dataon U.S. liquids production has shown an ever rising trend in year over year liquids production.

You can imagine how the champions of King Coal will exploit this opportunity, as well as the companies minting it coin and fist as they pollute the states’ water aquifers via fracking. Because when it comes to crises in the Middle East, ready access to cheap energy always trumps environmental concerns. The unfortunate upshot of this is that oil isn’t going anywhere. American oil consumption — as a percentage of its total primary energy consumption — now stands at about 37 percent. That’s the exact same percentage as in 1949. Today’s Middle Eastern tensions will almost certainly guarantee that this percentage won't be going down anytime soon.

Marshall Auerback is a market analyst and commentator.